Huckabee's 'FairTax' has appeal, problems

The appeal is in its simplicity: one tax rate for all goods and services. The problem is in its fairness.

By TOM REDBURN, New York Times

Last update: January 5, 2008 - 5:48 PM

Part of Mike Huckabee's appeal is his proposal to eliminate all federal income and payroll taxes. "And I do mean all -- personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment," he says on his website.

Instead, Huckabee advocates the FairTax, "a simple tax based on wealth," he calls it.

Under the plan, Americans would pay only one federal tax, which would be applied to just about everything they buy -- not just goods but nearly all services, including health care and insurance, a home purchase or apartment rental, even things like neighborhood baby-sitting.

But the so-called FairTax is not quite so simple. And, to most tax experts, it is anything but fair. For one thing, its burden would fall disproportionately on middle-income people.

Still, the plan has undeniable appeal. "There is a yearning across the political system to make the tax system better," said William Gale, a critic of the proposal who is a leading tax economist at the Brookings Institution, the liberal-leaning organization in Washington.

Supporters, including a handful of tax experts such as Laurence J. Kotlikoff, an economist at Boston University, contend that a rate of about 23 percent, applied across the board, would bring in just as much money as all the taxes the federal government now collects.

But most analysts say the tax rate necessary to replace current federal revenues, under any likely plan, would need to be much higher. By some estimates it could add 40 percent, if not more, to the cost of living.

Whatever the rate, critics say, a steep federal retail tax, on top of existing state sales taxes, would encourage widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.

"The main weakness of the FairTax is its comprehensiveness," said Dale W. Jorgenson, an economist at Harvard who opposes the plan but whose research into problems with the current system is sometimes cited by supporters. "It tries to roll everything into one tax, which simply can't carry all that weight."

Like any tax on consumption, the biggest burden, comparatively, would fall on the poor. To help compensate for this, the FairTax would provide a monthly government check to every American household, rich and poor alike.

But, apart from the administrative nightmares associated with giving every household a rebate, it would still not prevent transferring a substantial part of the current tax burden from those with annual incomes above $200,000, who tend to save a large part of their income rather than spending it, to those earning less.

Advocates for the proposal look at the distribution of taxes differently. Kotlikoff argues that those who avoid taxes on their savings now would end up paying later when they consume their wealth.

"The FairTax, looked at correctly, is actually pretty progressive," contends Kotlikoff, who has been paid by the FairTax organization for his research.